Reserves transferred to life and annuity sidecars approached $55 billion in 2023, according to AM Best.

According to AM Best, reinsurance leverage and surplus relief have significantly increased in recent years, primarily due to strong annuity premium growth. This expansion has driven additional capital into the market, while several life and annuity (L/A) insurers have established sidecars to manage their growth and risk-based capitalization.

The ratings agency reports that ceded reserves to sidecars nearly tripled from around $17 billion in 2021 to approximately $55 billion by the end of 2023.

AM Best's latest report highlights the notable growth in individual annuities, spurred by rising interest rates. Given the capital-intensive nature of annuities, this expansion has heightened the demand for additional capital in the reinsurance market, supporting insurers in maintaining their financial strength while managing growth.

As a result, reinsurance leverage in the individual annuity sector—measured by ceded reserves relative to capital and surplus—has steadily increased over the past four years. A key trend during this period has been the growing use of sidecars as a strategic tool.

By the end of 2023, around a dozen U.S. L/A insurers had ceded business to sidecars, a number that has tripled since 2021. Several new sidecars were also formed in 2024. Notably, Martello Re (MassMutual), Ivy Re II (Global Atlantic/KKR), and Prismic Life Re (Prudential/Warburg Pincus) accounted for nearly 75% of total ceded reserves, primarily covering indexed and fixed annuities. AM Best expects this trend to accelerate as more deals close in 2024, supporting continued annuity growth.

Some L/A insurers have started by ceding initial blocks of business to sidecars, allowing them to gain scale and diversify risk. Over time, these sidecars may expand to reinsure a broader range of business, including third-party or legacy blocks. For example, Prudential Financial recently announced a deal to reinsure $7 billion in Japanese whole life insurance reserves through Prismic Life Re, further diversifying the sidecar’s portfolio.

AM Best also points out that the growing presence of sidecars has provided private capital with another entry point into the L/A sector. While asset managers backing these sidecars may maintain long-term commitments to the insurance market, the investment model often follows a traditional private equity approach, with commitments ranging from three to seven years.

However, analysts caution that separate ownership and governance structures in sidecars may introduce risks. While these entities provide reserve and risk-based capital relief to asset managers, they could also adopt different strategies or underwriting approaches over time, leading to shifts in business mix and potential new risks.

AM Best notes that discussions with industry leaders reveal a strong commitment to long-term strategies and a clear understanding of the risks involved in annuity and life insurance products.